Do you know the present level of turnover you need to achieve in order to breakeven?
Breakeven in this context means making no net profit or loss on trading activities. It is an activity indicator that sets a sales target you will want to achieve to avoid drifting into a loss-making position.
To calculate your breakeven point, you will need the following numbers:
· Your gross profit percentage – sales less direct costs (raw material costs etc) expressed as a percentage of sales. A business with direct costs of £40 for every £100 of sales would have a gross profit percentage of 60%).
· The total of any remaining fixed business costs – rent, repairs, office costs, any costs not classified as direct costs.
Breakeven turnover can then be calculated by the formula:
Fixed costs / Gross Profit x 100.
If the total fixed costs in the above example were £20,000 your breakeven turnover would be £33,333 (20,000/60*100).
All businesses that have no direct costs – for example, providers of services rather than goods – will have a breakeven turnover equal to their fixed costs.
For the purposes of this exercise fixed costs should include self-employed traders’ drawings and directors’ dividends.
Source: informanagament
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